Aberdeen Asset Management Fixed income overview March 2016 David Lloyd-Nolan, Senior Fixed Income Product Specialist Aberdeen Asset Management For professional investors only Not for public distribution
United States Unemployment Goldman Sachs financial conditions index 11 CBO* Natural Rate of Unemployment Civilian Unemployment Rate 103 10 9 102 101 Tightening financial conditions 8 7 100 6 5 99 98 Easing financial conditions 4 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 97 2009 2010 2011 2012 2013 2014 2015 2016 Source: Economic Research Division, Federal Reserve Bank of St. Louis and United States Department of Labor. CBO Congressional Budget Office estimate. 31 Dec 15 Past performance is not a guide to future results Source: Goldman Sachs Financial Conditions index, Dec 15 Economy nearing potential 1
Europe PMI data ECB staff forecasts for 2016 58 Eurozone France Germany Italy 1,8 Growth CPI inflation 56 54 1,6 52 50 1,4 48 1,2 46 44 1,0 42 40 jan 13 jul 13 jan 14 jul 14 jan 15 jul 15 jan 16 0,8 mrt 14 jun 14 sep 14 dec 14 mrt 15 jun 15 sep 15 dec 15 Source: Bloomberg, For illustrative purposes only. No assumptions regarding future performance should be made, Markit, 31 Dec 15 Source: Bloomberg, For illustrative purposes only. No assumptions regarding future performance should be made Dec 15 Sluggish growth and declining inflation 2
European high yield 3
European HY market has developed Rating 31 Dec 02 31 Dec 07 31 Jan 16 European HY Market Size ( bn) 41.1 75.4 303.0 Number of issues 129 182 574 Number of issuers 88 142 318 Top 50 issuers 87.6% 71.7% 54.8% Countries of risk 20 30 36 Non Euro countries of risk 10 19 23 Duration (years) 3.3 4.0 3.5 Average quality BB3 B1 BB3 Source: BofA Merrill Lynch, HE00 4
Divergences created by sovereign stress, monetary policy, and energy exposure Correlation of Euro and Dollar High Yield Returns Correlation of Euro High Yield and 10Y Bund Returns 100% Return correlation Beta of EUR HY to USD HY (RHS) 1.4 100% 75% 1.2 75% 1.0 50% 25% 50% 0.8 0% 0.6-25% 25% 0.4-50% 0.2-75% 0% Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 0.0-100% Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Source: JP Morgan, 6 Jan 16. Rolling 52 week correlation 5
Why invest in High Yield now? Spread (basis points) 2.500 Euro High Yield 2.000 1.500 1.000 500 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Bloomberg. For Illustrative purposes only. No assumptions regarding future performance should be made, Merrill Lynch (HE00 index), 29 Jan 16 European High Yield average credit rating BB BB- B+ B 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JP Morgan, 31 Jan 16. For illustrative purposes only 6
Defaults to remain low High Yield default rates 16% FY Default Rate - Europe FY Default Rate - US EU Forecast* US Forecast 12% 8% 4% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 * JPM forecasts for Europe in 2016 No assumptions regarding future performance should be made Source: JP Morgan, S&P and Moody s Investor Services, Nov 15 7
Performance Aberdeen Global Select Euro High Yield Bond Fund % Annualised performance 3 months 6 months 1 year 2 years 3 years 5 years Fund* -0.75-0.62 3.20 3.14 4.61 5.30 Sector average -2.35-2.46-0.99 1.27 3.34 4.33 Quartile 1 1 1 1 1 2 * net of annual charges, EUR Past Performance is not a guide to future results Source: Morningstar, 31 Jan 16 Outperformed: Top quartile Manager: 9 of last 13 calendar years 7 of last 13 calendar years ^ EHY Universe As at 31 Dec 15 Source: Lipper to 31 Dec 14, Morningstar thereafter Standing out from the crowd 8
Positioning: credit rating Benchmark Q4 15 Relative exposure Q4 15 Number of holdings and exposure to B rated bonds 0.0% BBB or above 64.8% BB 29.7% B 5.5% CCC or below 0.0% Unrated 0.0% Cash 180 160 140 120 100 80 60 40 20 Number of holdings (LHS) % Exposure to B (RHS) 80 70 60 50 40 30-60% -40% -20% 0% 20% 40% 0 20 Q4 11 Q4 12 Q4 13 Q4 14 Q4 15 Benchmark: BofA Merrill Lynch Euro High Yield Constrained (HEC0). Cash includes cash at bank, outstanding settlements, call account cash, fixed deposits, cash used as margin and profit/losses on both derivative positions and forward currency contracts. The portfolio and benchmark data shown uses S&P where available, if not, Moody's, then Fitch. This may differ from the ratings used by the benchmark provider detailed in the IMA Source: Aberdeen Asset Management, 31 Dec 15 9
Positioning: sector and geography Benchmark Q4 15 Relative exposure Q4 15 Benchmark Q4 15 Relative exposure Q4 15 7.7% Automotive 21.2% Banking 14.0% Basic Industry 1.8% Austria 12.5% France 8.9% Capital Goods 0.0% Cash 1.7% Consumer Goods 5.6% Energy 15.3% Germany 1.3% Greece 2.3% Ireland 1.0% Financial Services 3.9% Healthcare 2.1% Insurance 19.1% Italy 3.0% Netherlands 2.5% Leisure 6.1% Media 0.4% Real Estate 0.9% Poland 6.5% Spain 3.5% Retail 5.0% Services 0.7% Tech and Electronics 1.4% Sweden 9.3% UK 10.6% Telecommunicatios 2.0% Transportation 3.4% Utility 5.4% US -20% -10% 0% 10% 20% 30% -20% -10% 0% 10% Benchmark: BofA Merrill Lynch Euro High Yield Constrained (HEC0) Sector allocations are subject to change and are provided for informational purposes only Source: Aberdeen Asset Management, 31 Dec 15 10
European convertible bonds 11
Convertibles compared to other asset classes Equities Bonds Convertibles Upside potential Unlimited Limited Unlimited Income Dividends Fixed Fixed but lower than bonds Risk Worst case scenario: the issuer defaults The investor can lose everything Recovery value (depends on the value of assets) Recovery value (similar to bonds) Source: Aberdeen Asset Management 12
Which risk to favour in order to increase the performance potential of a traditional Fixed Income portfolio? Securitisation products Financial Subordinated Correlation Emerging Debt Debt Subordination Currency or Geopolitical Default Government Bonds and Investment Grade Portfolio Equity High Yield Duration Convertibles Risk Source: Aberdeen Asset Management Long Term Debt Asset Class 13
Convertible performance in 2015: an illustration of convertibles benefits Convertibles returns in line with equities in 2015, but with much less volatility Benefits of the asset class illustrated 125 Thomson Reuters Europe Stoxx Europe 600 (Total Return) 120 115 110 105 100 95 dec 14 jan 15 feb 15 mrt 15 apr 15 mei 15 jun 15 jul 15 aug 15 sep 15 okt 15 nov 15 dec 15 Source: Aberdeen Asset Management, Bloomberg 14
Convertible bonds have a fixed income risk profile One year rolling volatility for asset classes 45% Convertibles Equities Investment Grade High Yield Government bonds 40% 35% 30% 25% 20% 15% 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Aberdeen Asset Management, Retail Share price (A) net of fees, Peer group is Lipper Global Bond Convertible Europe Cash is EONIA compounded daily 15
Convertible profile categories Four main regimes Equity-sensitive Distressed Very low parity Very high premium Falling bond floor Low cash price Credit/rate-sensitive, bond-like Low parity High premium Low delta Out-of-themoney Balanced, new issue-like Moderate parity Moderate premium Moderate delta At-the-money High parity Low premium High delta In-the-money Share price Source: Aberdeen Asset Management 16
jan 99 jul 99 jan 00 jul 00 jan 01 jul 01 jan 02 jul 02 jan 03 jul 03 jan 04 jul 04 jan 05 jul 05 jan 06 jul 06 jan 07 jul 07 jan 08 jul 08 jan 09 jul 09 jan 10 jul 10 jan 11 jul 11 jan 12 jul 12 jan 13 jul 13 jan 14 jul 14 jan 15 jul 15 jan 16 Equity sensitivity over time Share sensitivity 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Thomson Reuters Datastream, Aberdeen Asset Management 17
Aberdeen Global II European Convertibles Bond Fund Performance in EUR gross of fees Performance % Account Benchmark 25 20 15 10 5 Account: Aberdeen Global II European convertibles bond fund Benchmark: 100% Thomson Reuters Europe convertible bond index Reporting currency: EUR Return type: Gross Inception date: 11 May 01 Reporting date: 31 Jan 16 1,50 6,08 4,34 7,01 6,84 8,25 8,08 5,73 5,44 5,11 4,77 0-5 -10-3,09-4,18-3,88-2,83-3,09-5,51-5,13-4,18-0,65 1Mo. 3Mo. 6Mo. YTD 1Yr. 2Yrs (ann.) 3Yrs (ann.) 4Yrs (ann.) 5Yrs (ann.) Retrun since inception (ann.) Returns since inception (cumulative) Return % 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 Account 108.33 9.86 5.07 9.99 17.66-8.22 12.61 31.10-22.73 3.56 14.21 12.20 Benchmark 98.49 8.83 4.69 11.69 18.46-9.37 11.31 37.76-27.09 2.16 16.59 12.01 Past performance is not a guide to future performance As the Fund invests overseas, its value may fluctuate as a result of currency exchange rates Source: The price of units and income from them may fall as well as rise and is not guaranteed. The investor may not get back the amount originally invested Account: Aberdeen Global II European Convertibles Bond Fund. Benchmark: 100% Thomson Reuters Europe Convertible Bond Index. Reporting Currency: EUR. Return type: Gross Inception date: 11 May 01. Reporting date: 31 Jan 16 18
Emerging markets 19
Sovereign spreads provide an attractive entry point JPM EMBI Global Diversified Index Sovereign Spread (bps) 1.400 1.200 1.000 800 600 400 200 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Bloomberg, JP Morgan, 31 Jan 16 20
But FX concerns remain JP Morgan emerging markets currency 120 110 100 90 80 70 60 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JP Morgan, Bloomberg, 12 Feb 16 21
The emerging debt yield pick up is compelling Yield (%) EM Local Currency (BBB+) EM Corporates (BBB) EM Hard Currency (BBB-) GE 10 yr (AAA) Spain 10 yr (BBB+) 14 12 10 8 40% investment grade* 54% investment grade* 6 4 2 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 * Investment grade portion of the JP Morgan EMBI GD EM Local currency index: JPM GBI-EM GD, EM Hard currency index: JPM EMBI GD, EM Corporate index: JPM CEMBI BD, US IG Corporates index: JPM JULI index. Standard & Poor s credit ratings are expressed as letter grades that range from AAA to D to communicate the agency s opinion of relative level of credit risk. Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. The investment grade category is a rating from AAA to BBB- For illustrative purposes only. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. Individuals cannot invest directly in an index Source: JP Morgan, S&P, Bloomberg, 19 Feb 16 Value across emerging markets 22
Comparison of indices Hard Currency 1 Hard Currency Corporates 2 Hard Currency Frontiers 3 Local Currency 4 Market capital US$662bn US$770bn US$74bn US$804bn Average rating (Moody s/s&p) Baa3/BB+ Baa2/BBB B1/B+ Baa2/BBB+ Investment Grade (%) 54 64 0 79 Number of countries 65 51 33 15 Number of issuers 133 550 42 15 Number of issues 503 1173 95 191 Yield (%) 6.5 6.5 8.6 6.9 Modified duration (years) 6.6 4.7 5.7 4.8 1 JPM EMBI Global Diversified Index 2 JPM CEMBI Broad Diversified Index 3 JPM NEXGEM Index 4 JPM GBI-EM Global Diversified Index Standard & Poor s credit ratings are expressed as letter grades that range from AAA to D to communicate the agency s opinion of relative level of credit risk. Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. The investment grade category is a rating from AAA to BBB- Source: JP Morgan, Aberdeen Asset Management, 31 Jan 16 23
Benefits of a blended approach Thirteen years benchmark risk and returns Benchmark annualised returns USD (%) 11 AG Select EM Bond 10 Frontier 9 EM HC Sovereign 8 7 6 EM Corporates EM LC Sovereign 5 4 3 6 7 8 9 10 11 12 13 14 Annualised volatility (%) Source: Aberdeen Asset Management, JP Morgan, 31 Jan 16. Past performance is not indicative of future results. For illustrative purposes only Benchmarks used: EM Corporate = JPM CEMBI BD, EM HC Sovereign = JPM EMBI GD, EM LC Sovereign = JPM GBI-EM GD, EM Frontier = JPM NEXGEM Fund used: Aberdeen Global Select Emerging Markets Bond Fund 24
A strong reform-oriented mindset established Narendra Modi leading the BJP and Raghuram Rajan the central bank make a powerful team Narendra Modi Prime Minister of India Deliver far reaching reforms Empower the states Increase investment Alleviate supply bottlenecks Increase productive capacity of the economy Raghuram Rajan Governor Reserve Bank of India Restore credibility to RBI Establish inflation targeting framework Create capacity on bank balance sheets Reduce country risk premium Structural decline in inflation Lower policy rates, yields and cost of capital Structural support for bond markets, stability in FX 25
mrt 10 sep 10 mrt 11 sep 11 mrt 12 sep 12 mrt 13 sep 13 mrt 14 sep 14 mrt 15 sep 15 mrt 16 sep 16 mrt 17 sep 17 mrt 18 Outlook: giving room for RBI to ease Indian CPI and RBI Policy rate 16 Consumer Price Index: YoY Policy Rate: Month End: Repo Rate 14 12 10 8 6 Mar 2016 Inflation Target at 6.0% Mar 2017 Inflation Target at 5.0% Mar 2018 Inflation Target at 4.0% 4 2 0 Note: New CPI series from Feb 15 onwards, base year updated to 2012 from 2010 and weights for food and fuel lower Source: Aberdeen Asset Management, Dec 15 26
Outlook Central bank policy remains key and divergence expected Low growth and low inflation should prove supportive of bonds Bond market is large and diverse always opportunities: European High Yield Credit risk favourable with default rates set to remain low European Convertibles A more cautious way of gaining exposure to equity markets with fixed income protection Emerging Market Debt Longer term opportunities despite weak sentiment India Largely untapped bond market undergoing positive structural change Source: Aberdeen Asset Management, 31 Jan 16 27
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